Disclosing Foreign Financial Accounts: Updates and Filing Requirements

Nardone Limited’s tax attorneys advise taxpayers about U.S. tax reporting requirements and obligations regarding foreign and domestic financial accounts and the importance of reporting previously undisclosed accounts or income. For example, if a taxpayer has a financial interest in, or signature authority over, a foreign financial account, the taxpayer may be required to report the account to the Internal Revenue Service (“IRS”). Those who fail to meet the IRS’ requirements could face criminal or civil penalties.  Fortunately, the IRS offers certain programs to those who have failed to disclose their foreign financial accounts that allows the taxpayer to voluntarily disclose offshore accounts and resolve any tax and penalty obligations.

Report of Foreign Bank and
Financial Accounts Filing Deadline

Every year, United States citizens and resident aliens, including those with dual citizenship, who have certain foreign financial accounts, such as bank accounts, brokerage accounts and mutual funds, must report those assets to the Treasury Department by electronically filing a FinCen Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). On April 4, 2019, the IRS published a news release reminding taxpayers of the requirements for disclosing foreign financial accounts. The deadline for filing the FBAR is the same as the deadline for filing a federal income tax return. Thus, the 2018 FBAR should have been filed electronically by April 15, 2019. But, the Financial Crimes Enforcement Network (“FinCEN”) grants those taxpayers who have missed the April 15th deadline, an automatic extension until October 15, 2019. The FBAR form is only available through the BSA E-Filing System website.

Generally, the requirement to file the FBAR applies to anyone who had an interest in, or signature or other authority, over a foreign financial account whose aggregate value exceeded $10,000 at any time during 2018. In its news release, the IRS encouraged taxpayers to check if the filing requirements apply to them, since the threshold amount is relatively small. If you have missed the automatic extension date, the IRS allows taxpayers to file a delinquent FBAR, as long as the taxpayer is not under civil examination or criminal investigation by the IRS, and the taxpayer has not already been contacted by the IRS.  But, for those taxpayers who have undisclosed foreign assets which span several years, the IRS offers two programs that allow taxpayers to become compliant and avoid significant civil or criminal penalties.

Streamlined Filing Compliance Procedures

The Streamlined Filing Compliance Procedures (“SFCP”) were first offered in 2012 as a way to provide taxpayers with a streamlined procedure for filing amended or delinquent returns, however, since 2012 the IRS has expanded and modified the program to accommodate more taxpayers. But, the SFCP is only available to individual taxpayers, and estates of individual taxpayers, who certify that their failure to report foreign financial assets and pay all tax due on those assets, was not due to willful conduct. This applies to taxpayers applying for the Streamlined Foreign Offshore Procedures or the Streamlined Domestic Offshore Procedures. Non-willful conduct is conduct that is due to negligence, inadvertence, or mistake or conduct that is a result of a good faith misunderstanding of the requirements of law. As mentioned above, if the IRS has already initiated a civil or criminal examination of the taxpayer’s returns, regardless if the examination relates to the undisclosed foreign account, the taxpayer is not eligible to use the SFCP. If a taxpayer is unsure whether their conduct was due to willful or non-willful behavior, it may be wise for the taxpayer to participate in the Updated Voluntary Disclosure Practice (“UVDP”) to avoid criminal liability or significant monetary penalties.

Nardone Limited Comment: If you are unsure whether your non-compliance is due to willful or non-willful behavior, it is important that you contact an attorney who is experienced in communicating with the IRS. For more information on the SFCP, or what the government considers to be willful behavior, see our previous blog article.

The Updated Voluntary Disclosure Practice

After the IRS ended the Offshore Voluntary Disclosure Program (“OVDP”) in September of 2018, it established the UVDP. Unlike the SFCP, the UVDP was created for taxpayers with exposure to potential criminal liability and substantial civil penalties—due to a willful failure—a way to come into compliance with the law. The UVDP applies to both domestic and offshore matters disclosed after September 28, 2018. While the UVDP does not guarantee that the taxpayer will be free from criminal prosecution, a voluntary disclosure may result in the IRS not recommending criminal prosecution. Under the new program, willful penalties will be the greater of $100,000 or 50% of the amount in the account at the time of the violation, and for cases involving willful violation over multiple years, examiners may recommend a penalty for each year the FBAR violation was willful.

Under the UVDP, a disclosure is considered voluntary when the taxpayer shows a willingness to cooperate. When speaking with the IRS about the taxpayer’s non-compliance, it is imperative that the taxpayer answer truthfully, timely, and completely. The taxpayer must show a willingness to cooperate, or the IRS will not consider the disclosure to be voluntary. As part of that cooperation, the IRS expects that voluntary disclosures be resolved by agreement with full payment of all taxes, interest, and penalties for the disclosure period. I.R.M. 9.5.11.9.4. If a taxpayer fails to cooperate, the examiner may request that Criminal Investigation (“CI”) revoke the preliminary acceptance. Thus, it is important that taxpayers ensure that they are timely replying to the IRS and that they are making arrangements, in advance, to pay off their delinquent taxes.   

Nardone Limited Comment: If you would like more information on UVDP, see our previous blog article.

Conclusion

We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their foreign or domestic financial accounts, even if they have not done so in the past. The IRS offers options to non-compliant taxpayers when it comes to disclosing unreported financial accounts or income. But, taxpayers must be diligent when it comes to communicating with the IRS. That is why it is important to seek help from an attorney who has vast experience representing taxpayers before the IRS. Ultimately, if you have undisclosed foreign financial accounts, or would simply like more information regarding your filing obligation, contact us today.